Pension Funding Relief Seen as Best Under the Circumstances

Kathryn Ricard, Senior Vice President, Retirement Security, for the ERISA Industry Committee, said that while the retirement services industry would have preferred not to have the conditions in the final bill tying the longer pension amortization periods to “excess compensation or extraordinary dividends or stock redemptions,” the connections were at least understandable. 

Ricard said she heard the same cautions from lawmakers from both sides of the aisle – that they could not be seen as implicitly condoning the acts of employers who wanted to funnel their available cash into higher salaries or dividends or other similar payments instead of ploughing the money into their underfunded pensions.  

That’s why the final version of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 requires an increase in alternate required shortfall amortization installments by an installment acceleration amount, during a specified restriction period (beginning after December 31, 2009). “Congress said they were going to look at (other) things that require cash,” Ricard explained.  

The final bill allows a sponsor of a single-employer defined benefit pension plan to elect in any two plan years between 2008-2011 extended amortization periods of nine (interest only for two years and a seven-year amortization) or 15 years instead of the usual seven years. Multi-employer plans are also given extended amortization periods.  

During the three-year period beginning with the election year (where the two +seven years alternative is elected) or the five-year period beginning with the election year (where the 15-year alternative is elected), the required contribution for any year would be increased by the amount of excess compensation – compensation paid to any employee, during the calendar year in which the plan year begins to the extent that it that exceeds $1 million. 

Ricard told PLANSPONSOR the final bill did not have provisions that industry lobbyists considered significantly more onerous, including a requirement for a government agency financial review for employers applying for the pension funding aid, a requirement that plans receiving the aid be required to stay active for a minimum period, and a bar to qualifying for the aid for plans frozen to new members. “That was something we didn’t think was appropriate,” Ricard remembered. “There were a lot of proposals (in earlier bill drafts) we though thought were much worse.”   

A Corporate Finance Decision? 

With the conditions in the final bill, agreed Ricard and Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group, whether a plan sponsor should take advantage of the longer amortization time horizon the bill offers is more of a corporate finance matter than strictly a pension management issue. 

Employers need to make a decision about how much economic damage they suffered during the recession, factor in their current and future compensation/dividend payments, and make a judgment call about whether they would, in fact, benefit more by taking advantage of the bill’s pension relief. “If a large portion of their workforce is highly compensated, it might not be worth doing,” Waite admitted.  

The process will get more complex because employers will have to factor in future merger and acquisition plans to see if those transactions would run the company afoul of the excess compensation/dividend provisions.  

“In some cases, they can really use that cash to stabilize their organizations,” Waite told PLANSPONSOR. “In some cases, they can use the cash better than for their pension plans. They are still committed to funding their pension plan but just want more time to do so.” 

That was a key underpinning of the industry’s argument to lawmakers, the two observers said – that it was worth giving some employers a pension funding breather if those resources can instead be used to strengthen companies’ overall financial standing. 

“Let’s help the businesses across the U.S. get more strength in their legs and help the economy keep moving,” Waite said.  

The text of the final bill is here.  An analysis of the bill is here.